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Monday, April 12, 2010

Postponing the inevitable?

Eurozone finance ministers yesterday agreed on a €30bn loan commitment to Greece over the next year, as part of a three-year commitment, with the IMF potentially coughing up another €10-15 billion. The interest rate on the loans is set at five percent for a three-year fixed loan – above the IMF’s standard lending rate but below the seven percent level asked for by the markets last week. Greece has not yet asked for the loans, but if and when they do, this will mark the largest multilateral financial rescue package ever attempted.

Unsurprisingly, the European media is flooded with reactions to the deal, and a worrying number of people appear convinced that even if the plan was to be put into action, it would only serve to postpone an inevitable Greek default (see here for instance).

In the FT, Wolfgang Munchau bluntly states that "Greece will eventually default. The numbers simply look to bad." There are also suggestions that the package will have to be far bigger than the suggested €40-45 billion to have impact. A senior finance ministry official apparently told Reuters that, "40 billion for 2010 is part of a bigger amount for the three-year period. A logical amount for the three-year period would be double 40 billion."

In addition, questions are now being raised over the compatibility of the deal with the bail-out/credit line ban in the EU treaties - and whether the deal will withstand a legal test in Germany's Constitutional Court. And then there are the national parliaments in Germany, Holland and Ireland, that will have to give their thumbs up before the plans can become reality.

One thing is certain, this story is far from over.

In any case, as we've noted before, the contributions will be based on how much each eurozone member is paying towards the running costs of the ECB (see the break-down here). Britian also pays towards the ECB (albeit at a discounted rate), but will not be required to provide loans apart from via its IMF contributions. After a quick crack at the numbers, this is what we calculated that each eurozone member will contribute to a €30 bn eurozone rescue package (consistent with what is being reported here for instance):